Mantega Plans 20% Cut in BNDES Loans to Slow Deficit

By Adriana Arai, Marisa Castellani and Arnaldo Galvao -
Nov 4, 2013

Brazil plans to reduce lending by its
development bank by about 20 percent next year to shore up
finances after posting the biggest budget deficit in almost four
years, fueling speculation the nation’s credit rating may be
cut. Local swap rates fell.

Finance Minister Guido Mantega said in an interview that
state lender BNDES will provide about 150 billion reais ($66.6
billion) in new loans in 2014, compared with an estimated 190
billion reais this year. That would bring BNDES credit a little
below 2012 levels. The government will freeze BNDES lending to
states and municipalities, unwind tax breaks on consumer goods
and keep current expenditures under control, the minister said.

“With respect to state banks, we will reduce stimulus,”
Mantega said at his Sao Paulo office on Nov. 1. Lending “will
be more focused and we will reduce subsidies.”

A reduction in loans by the BNDES, whose $232 billion
portfolio is 60 percent larger than the World Bank’s, would
address concern raised by Moody’s Investor Service and Standard
& Poor’s that public lending is boosting debt to levels higher
nations with the same rating. S&P in June placed Brazil’s rating
on negative outlook, and Moody’s last month lowered its outlook
to stable from positive.

Brazil’s 59 percent public debt-to-gross domestic product
ratio compares with a 45 percent median for other nations with
bonds rated Baa2, the second-lowest investment grade, according
to Moody’s. S&P has Brazil as a BBB, equivalent to Moody’s.
makers will limit borrowing cost increases.

Swap rates due January 2016 fell four basis points to 11.38
percent at 10:00 a.m., the biggest drop since Oct. 25. Rates due
January 2017 fell four basis points to 11.64 percent. The real
gained 0.4 percent to 2.2449 per dollar.

October Improvement

BNDES issued loans totaling 156 billion reais in 2012 and
139 billion reais in 2011. The World Bank had loans outstanding
totaling $144 billion as of June 2013, according to its website.

An Oct. 31 report showed Brazil’s budget deficit widened to
3.3 percent of gross domestic product in the 12 months through
September, more than analysts expected and the biggest since
November 2009.

Mantega said fiscal performance already improved in
October, adding the September numbers were hurt by one-off
spending on thermal plants, a surge in social security payments
and lending to states and municipalities.

“This year we’re doing all we can to make public spending
more transparent,” the minister said.

As consumer demand recovers, tax breaks are removed and
investment rises, tax revenue will grow and improve fiscal
performance going forward, according to Mantega. By April or
May, when credit rating agencies visit Brazil, fiscal accounts
will have improved, he said.

Negative Watch

If the downgrade “depends on the performance of public
accounts and growth, that will only get better,” Mantega said.
“We are looking at all spending for reductions.”

Gross domestic product in Brazil, the world’s second-largest emerging market, is forecast to expand 2.5 percent this
year, down from an estimate of 3.26 percent at the beginning of
2013, according to central bank weekly surveys of economists.

Next year the government will generate a primarybudget
surplus, which excludes interest payments, of between 2.2
percent of gross domestic product and 3.1 percent of GDP,
Mantega said. The surplus in the 12 months through September
fell to 1.6 percent from 2.3 percent a year earlier.

Mantega said he’s reviewing all expenditures and is looking
into a surge in outlays in unemployment benefits, which may
reach 47 billion reais this year, or about one percent of GDP.
The government suspects fraud because the economy has full
employment, he said.

Budget Deficit

The widening budget deficit report last week helped the
real fall for the fourth straight session to record its biggest
weekly drop since August.

The real closed 0.6 percent lower Nov. 1 at 2.2538 per U.S.
dollar. The currency depreciated 3 percent last week, the third-largest drop against the dollar among 16 major currencies
tracked by Bloomberg. Swap rates on the contract due in January
2015 climbed 10 basis points, or 0.10 percentage point, to 10.67
percent and increased 20 basis points for the week.

While any deterioration in fiscal policy or inflation may
lead to a ratings downgrade, such a move is unlikely in the next
18 months, Goldman Sachs’ chairman in Brazil, Paulo Leme, said
at an event in Sao Paulo on Nov. 1.

Mantega said the impact of the U.S. Federal Reserve plan to
reduce stimulus will be limited by the fact that currency and
rates markets have already priced in the measure.

The Brazilian central bank this year raised the benchmarkinterest rate to 9.5 percent, and Mantega said the government
would “act strongly” to contain price pressures.

Petrobras

Consumer prices in the 12 months through mid-October rose
5.75 percent, according to the national statistics agency. The
central bank targets annual inflation at 4.5 percent plus or
minus two percentage points.

Mantega said the outlook for inflation in 2014 is benign in
the absence of a decline in the currency.

The government is still developing a new fuel pricing model
for the state oil company, Petroleo Brasileiro SA (PETR4), said the
minister, who also serves as the company’s chairman.

The new model, designed to reduce fuel subsidies provided
through Petrobras, will have to exclude currency spikes so it
doesn’t fuel inflation, Mantega said. A proposal may not be
ready to be voted on the next Petrobras board meeting Nov. 22,
he said.

The fiscal impact of the measure will be positive because
Petrobras will increase profit and pay more corporate tax,
“though that’s not why we’re doing it,” said Mantega.